I think it might be more complicated than that. I'm not an expert in any way, but in reading http://www.irs.gov/publications/p17/ch14.html I stumbled across
What Is a Sale or Trade?
This section explains what is a sale or trade. It also explains certain transactions and events that are treated as sales or trades.
A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money.
A trade is a transfer of property for other property or services and may be taxed in the same way as a sale.
I am glad that you posted this, it brings us to the crux of the matter. See the distinction made up there between a
sale and a
trade? A
sale occurs when
property is traded for money. A
trade occurs when
property is traded for property. The IRS has stated that
crypto-currencies are property and not money.Since crypto-currencies are called property by the IRS, and not money, the conversion or exchange of one crypto for another cannot be called a "sale". It is hard to argue that any crypto is a "mortgage, note, or other promise to pay money". Perhaps when BitUSD is created, it could be considered a "promise to pay money" and thus transfers/exchanges in/out of BitUSD would be considered sales. I know that the Ripple exchanges trade explicit "IOU's" issued by private companies. That part is tricky, and I'm not prepared to provide an opinion on that.
How To Figure Gain or Loss
You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property.
Gain. If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain.
Loss. If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss.
Adjusted basis. The adjusted basis of property is your original cost or other original basis properly adjusted (increased or decreased) for certain items. See chapter 13 for more information about determining the adjusted basis of property.
Amount realized. The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees). Amount realized includes the money you receive plus the fair market value of any property or services you receive. If you received a note or other debt instrument for the property, see How To Figure Gain or Loss in chapter 4 of Publication 550 to figure the amount realized.
If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. For more information, see Publication 537.
Fair market value. Fair market value is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts.
Let's take a hypothetical. I have 1 BTC. It is worth $1000, I bought it from Coinbase for $1000. I trade it on an exchange, directly for 25 LTC. This is an equivalent exchange. I have not made or lost money on the exchange. The two amounts are equal, in dollar terms.
Now I wait a while, the value of LTC has gone up, I trade those 25 LTC for 1.5 BTC. 1 BTC is still worth $1000. Now what has happened? I have gained $500 in value from the appreciation of the LTC. However, trading 25 LTC for 1.5 BTC is still a like-for-like exchange. I had $1500 worth of LTC, now I have $1500 worth of BTC. I don't have $1500, I have $1500 worth of BTC.
I haven't realized any gains. My gains come from the appreciation of LTC, not the trade itself.
If I could pay taxes in BTC (i.e. if BTC were recognized as a "currency" by the IRS and not a piece of property), then maybe I would have to pay 20% in capital gains on my BTC. But I can't pay taxes in BTC, BTC are not currency or money, so my taxes are deferred until I transfer my 1.5 BTC to Coinbase and receive $1500 in my bank account.
1) mining and/or premining rewards- When you receive your rewards (need more clarity on if this is moment of confirmation or moment of payout from a pool to external address. probably the former if my understanding of stock awards is accurate and relevant) this is taxed as income at fair market value. This must be reported as income.
Mining is the same as creating an asset for sale. Say you have a business making furniture. You buy $100 worth of wood, add your labor and create a table that you are going to sell for $1000. Do you pay taxes when you make the table? No, you pay taxes when you
sell the table and get $1000.
Stock awards are different. The company awards you $20k in stock on 1/1/14, the company records $20k in expenses (so they don't have to pay taxes on that $20k) and you record $20k as income (so you do have to pay taxes on that $20k). If the valuation were allowed to "float" until you actually sold the stock, the accounting would be all screwed up. So you record $20k as income, you pay taxes on that $20k, you hold the stock for 5 years and it turns into $30,000. You sell for $30k, and you pay taxes on the profit of $10k, since $20k was your basis.
Topic 409 - Capital Gains and Losses
Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When a capital asset is sold, the difference between the basis in the asset and the amount it is sold for is a capital gain or a capital loss. Generally, an asset's basis is its cost; however, if you received the asset as a gift or inheritance, refer to Topic 703 for information about your basis. You have a capital gain if you sell the asset for more than your basis. You have a capital loss if you sell the asset for less than your basis. Losses from the sale of personal-use property, such as your home or car, are not deductible.
Once again, refer to the definition of
sale at the top -- cryptos are not money, you cannot "sell" anything for cryptos according to the IRS.
Leads me to believe that if you have held a property for less than a year and you trade it for another property any gain in the value since you received that property is taxed at the income tax rate.
Yes, if you buy BTC and hold it for less than a year before you sell it, your gains will be taxed at your income tax rate. This is the same as counting it as self-employment income.
3) Capital gains from barter trades or sales of assets- If you have held a property more than a year and then sell and or trade it for another property you will report it as capital gains, and pay the capital gains tax rate.
Yes, this should be how it works, the IRS has not stated anything to contradict this.
Now, this may lead to the need for some creative accounting if you're a miner. You should sell all of your mining earnings and convert them into USD. This is considered your self-employment income. If you want to hold cryptos long-term, you should purchase them from your USD holdings instead of just holding on to your mining earnings. This clearly puts the cryptos mined into the "income" side and the long-term cryptos into the "capital gains" side. If you mine some coins and hold them for 3 years, ALL of the appreciation would likely have to be considered as "income" and be taxed at the higher income rate rather than the long-term capital gains rate.
NOTE: I am not a CPA or any kind of tax, financial, or legal professional, and my statements do not constitute legal, accounting, or other professional advice. (And any CPA who came on here and gave such advice would be pretty dumb, it could expose him to liability.)
In the end, it is up to the individual to interpret the tax laws, and to follow precedents from tax courts. If you use a CPA for your taxes, your CPA will do it in a way that he feels legally comfortable, but it may not be to your maximum advantage. If you do your own taxes, you are left to interpret the laws yourself, and as long as you take a reasonable, straightforward interpretation and file and pay your taxes properly in good faith then you cannot be prosecuted for tax fraud, although you may face administrative fines if you are found to have under-paid. You are not obligated to interpret rules in such a way as to maximize your taxes paid.
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